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Digital download markets: cut up and segregated

How Australian digital download providers turned back the clock

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Comment In recent years there has been a worldwide move towards “free” trade. Arguably there have been winners and losers from this process. One winner has been consumers in Western countries who enjoy purchasing content like music, film, games and software.

In my home country, Australia, one of the success stories of the late 1990s was the introduction of parallel imports in the music industry. Parallel imports allow retailers to import authorised CDs from anywhere else in the world. Retailers can legally sell these CDs in Australia, and many do, delivering cheaper CDs to Oz consumers.

We have seen similar trends in free trade zones like the EU. As a result of these free trade zones, we are increasingly seeing in countries like the UK, France and Germany more CDs in shops that have been manufactured elsewhere in the EU, and have been imported into those countries. Typically these parallel imports and free trade zone imports are chart CDs or compilation CDs, rather than independent or less overtly commercial CDs. Certainly you are more likely to find compilation CDs in UK stores that have been manufactured and imported from Portugal, Slovenia or Estonia than before. You can spot them by their lower price! It may not be to your taste, but it does provide an alternative for the budget conscious.

In Oz, parallel imports are the reason we can purchase current chart albums in some shops for as little as US $7.50 each. These CDs are usually identical to the Australian manufactured version of the same CD, except they are manufactured in places like Argentina, Mexico, and Indonesia. Despite what IFPI, ARIA and MIPI may claim, these are not “pirate” CDs – these are legal imports, manufactured by the artists’ record companies in those countries.

Artists benefit from parallel imports – they receive sales royalties whether or not the CD is manufactured locally or is manufactured in say Mexico, and is imported into Australia.

However, in Australia the local recording industry was always opposed to parallel imports. There was a long fight between major record companies on one side, and consumer advocates on the other side. This was because, to use an example, a Universal Music CD imported from Mexico and sold in Australia adds to the sales revenue and “bottom line” of Universal Music in Mexico, not to Universal Music in Australia. Naturally, the local branch of the multinational record company wants to hang onto the local sale if possible, in order to maximise local revenue and profits! Doubly so if the bonuses of local record company execs are tied to local sales levels!

Given the past behaviour of the Australian branches of multinational record companies towards the parallel import of physical CDs, it’s not surprising that these record companies and digital content re-sellers have allowed the market for digital downloads to by-pass Australia's parallel import laws.

So what does this mean to consumers?

To look at one digital download provider, instead of iTunes having a single service selling all of its sound recordings from a single server to the entire world for a single price, there are 21 iTunes services in different markets. These services charge different prices and have different products available. As a result, after adjusting for currency differences, UK iTunes consumers pay more for downloads than Australian iTunes consumers, who in turn pay more than US iTunes consumers. Why offer different prices for different markets? Isn’t this simply artificial market segregation to maximise profits? The Australian iTunes service launched without Sony/BMG repertoire. So, why should Australian iTunes consumers be locked out of Sony/BMG repertoire when UK and US consumers can obtain these tracks? Why should US iTunes customers be able to buy digital downloads by Australian artists Delta Goodrem and INXS when Australians can’t buy these same tracks from the local iTunes service?

Consumers are typically locked out of international services unless they have a locally issued credit card. This “lock out” takes place because the world has been divided into different territories or music markets. In this way the digital download market operates the same way as the Australian market for physical CDs in the 1990s, which was prior to the introduction of parallel CD imports.

In Australia, under current laws, if physical CDs were 55% more expensive in Australia than the US, or were unavailable in Australia, retailers could simply import them from the US and sell them locally. These rules don’t apply to the digital music market in Australia.

Effectively, the music industry has been able to resurrect territoriality. Territoriality was lost by record companies in Australia in the late 1990s when parallel imports were introduced. To some degree, territoriality was lost to in other countries when free trade agreements were executed allowing cheaper CDs to be imported from “low cost” countries.

With territoriality resurrected, consumers again face excessive prices and limited choice. Despite the atmosphere of free trade, local digital music re-sellers are protected from international competition, record company profits are maximised, and local consumers are left to watch other markets in envy.

IFPI has proudly proclaimed that there are over 300 international re-sellers of digital music downloads. Yet only a handful of these operate re-sellers operate on a worldwide basis. IFPI even seem to endorse territoriality when they invite consumers to visit their worldwide directory of Authorised Digital Music Services – a worldwide directory which is conveniently divided into 37 separate country-based directories (including the UK, US, Australia, Canada and New Zealand – to name 5), and only 3 “barely there” continental directories.

The operation of the internet was supposed reduce the market powers of major record companies, which have long disadvantaged consumers. It was supposed to create a democratic environment, thereby delivering cheaper music and a wider range of repertoire to consumers. While the internet has boosted the thriving independent music sector, the internet does not seem to have been allowed to benefit consumers and fans of major label product.

By their actions, major record companies and traditional retailers have effectively ceded control of the on-line market place to online resellers who are happy to take us back to the 1990s. While the leaders of the digital revolution were proclaiming the democratization of the music industry as a result of the impact of new technologies, these same new technologies were being used to create a brand new closed, uncompetitive market place.

If an Oz consumer wants to access the US Napster, Wal-Mart or iTunes services why can’t he or she do it? For that matter - why can't ANY international music consumers access ANY international music service? Or are we only supposed to enjoy the benefits of globalisation and the internet as a market without borders when the record companies and content re-sellers say it’s ok for us to do so? ®

Alex Malik is a technology lawyer and music industry commentator. He can be contacted at Alex.Malik@student.uts.edu.au.

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