Comment
Parallel importing and its impact on the creative industries
14. Parallel importing can decrease prices, increase choice and in some cases, the availability of titles and provide for more timely release of products. In short, parallel importing enables greater competition in the market place for the benefit of consumers. In some situations, however, parallel importing can impact negatively on creative industries. This review has therefore looked specifically at the effects on New Zealand's creative industries to consider any impact that parallel importing has had or could have (in the case of film).
15. There are a range of factors, regulatory and other, that impact on investment in the creative industries in New Zealand. For example, investment in film production in NZ is based on location, environment, exchange rates, tax system, grants and subsidies and film-making infrastructure. Given the broad range of factors, the 2007 review has considered the likely impact of parallel importing, and the extent to which a parallel importing ban could help achieve some of the objectives identified around investment in the film industry.
16. There are a range of other government initiatives that can, and do, assist with development of and investment in creative industries. Examples include the provision of funding or investment in the development and production of various creative products, or provision of training programmes or research. Specific initiatives are targeted through government agencies such as the Music Commission, or Crown Entities such as the Film Commission, Creative New Zealand, NZ On Air and Te Papa.
Book Industry
17. The book industry in New Zealand appears to be growing with no major detrimental impacts as a result of parallel importing. In general, book sellers stock books from New Zealand publishers if titles are available. Commercial parallel importation is predominantly of niche and backlist2 titles.
Book Publishers and Authors
18. International companies are responsible for about 90 percent of New Zealand publishing output. New Zealand publishers supply about 60 percent of all domestically sold books mainly through local subsidiaries of international companies. There are also a number of local publishers marketing New Zealand-authored books exclusively for the domestic market.
19. In the 2005 review, publishers raised concerns that parallel importing would negatively affect the domestic industry with regard to educational and technical books as well as remaindered3 stock which would be resold in New Zealand. This would also affect New Zealand authors who in general, are reliant on domestic publishing support. However, in the last ten years the number of children's titles published has trebled with significant export growth in these products.
20. Previous MED research indicated that rights to print and sell a New Zealand title overseas will rarely be sold unless the title has already achieved a certain level of domestic success. Therefore the perceived threat of remaindered stock to domestic sales is limited.
21. MED also previously reported that parallel importing did not appear to have any effect on decisions by New Zealand based subsidiaries of international publishers to publish local authors. Local demand for local authors appeared sufficient for domestic publishers to profitably publish them if international publishers refused to do so as a response to competition from parallel importing.
22. The review has confirmed MED's previous findings which indicate industry growth for book publishers and therefore authors.
23. The 2007 review revealed a concern felt by book publishers to the effect that parallel importing reduces their revenue from backlist foreign titles and that were parallel importing to increase significantly, the viability of some publishers in New Zealand could be compromised. On the whole, however, the negative impacts are not regarded as significant.
24. There have been a small number of international publishers who have moved their warehousing from New Zealand to Australia. This rationalisation has partly been attributed to the threat of parallel importing. The detrimental impacts, however, for the industry as a result of this rationalisation are minimal.
Book Sellers
25. Book sellers do not see parallel importing as the threat they once perceived. The main issue for book sellers is competition from buying online direct from foreign publishers.
26. Book sellers consider that parallel importing has improved service, title range and availability. The parallel importation of books has been attributed as the main reason release dates in New Zealand of foreign-authored books have moved from being 3 to 6 months behind the United Kingdom, to within 1 to 3 weeks. The official release is often simultaneous with the delay necessitated by the time for transportation from overseas printing firms.
27. In the past few years, prices for new release titles have increased about 25 percent due to transportation costs for books, the majority of which are not printed in New Zealand. Book sellers consider, however, that parallel importation has allowed them to target a new consumer market for backorder titles4 catering for those people not willing to wait for niche titles or for those that will not pay full price for any title. From this, it can be surmised that without parallel importing, one segment of the market would not purchase at all, and another would turn to online purchasing channels.
Conclusions
28. Parallel importing does not appear to have affected the publishing and promotion of New Zealand titles. It has been suggested by book publishers that the level of promotion may have been greater if they were able to increase their margins without the threat of parallel importing, nevertheless industry growth seems likely to continue in the near future.
29. The book industry's next major challenge appears to be the development of digital books. There is still uncertainty as to the availability of reader-friendly formats and it is likely that backlist titles and technical/niche titles not typically stocked in New Zealand will be the first titles on offer. Because of the cost involved in the technology, the conversion to digital books will be slow and for the foreseeable future it appears books in their regular format will control the market.
30. Therefore, I recommend we maintain the status quo and continue to allow parallel importation in the book industry.
Sound Recording Industry
31. The New Zealand music industry experienced positive growth until the last two years with the decline in CD sales as a result of the increasing trade of pirated goods. Industry has indicated that in light of piracy issues, even small levels of parallel importing have affected domestic distributors and New Zealand. The more successful New Zealand artists on the international stage, whose works are frequently exported, tend to be more affected by parallel importing.
32. MED previously concluded that parallel importing, or even the threat of parallel importing, in some cases led to lower prices5 and benefits such as a greater availability of titles. MED did not find any effect on decisions by record companies to sign local artists. Current industry concerns are that margins do not allow for record companies to invest in infrastructure or promotion of both domestic and foreign artists. The industry reports that the market in which it operates has decreased by 25 percent in the last 5 years, and with the occurrence of parallel importing increasing (especially in the last 6-8 months), its opinion is that the market will likely continue its decline. Although the industry is facing challenges from piracy, it is unlikely that a stricter parallel importing policy could greatly assist the industry.
Artists and Distributors
33. There are only a few domestic artists who are popular internationally and therefore have a substantial number of CDs produced for an overseas market. Only those artists are at risk of having their CDs parallel imported.
34. New Zealand artists are funded by record companies (generally the New Zealand branches of international recording companies who also serve as New Zealand local distributors). New Zealand artists are reliant on successful retail sales with merchandising and touring supplementing CD sales. Record companies are heavily reliant on retail sales for both domestic and international artists. Because of New Zealand's market size, record companies earn less revenue than international counterparts in larger countries and therefore, reinvestment in New Zealand's sound recording industry is lower than in international markets.
35. CD sales are decreasing in number with the increasing trend of digital distribution and illegal downloading. Because of the increasing rate of piracy, the sound recording industry is in a decline that is unlikely to be reversed through a ban on parallel importing.
36. Some in the industry believe that reintroducing restrictions on parallel importing would allow local artists and domestic recording companies to increase the price of domestic artist CDs to levels that would allow for increased investment in, and promotion of local artists. They claim that the availability for consumers to purchase on the internet and obtain illegal downloads would provide a check on excessive price increases. It is questionable whether the parallel importing regime would provide major benefits to the sound recording industry in light of the more significant issue of piracy.
37. Touring and merchandising has recently become a more attractive revenue stream for industry participants, however, these earnings are not as significant as the royalties that the industry was earning before CD sales declined. The Recording industry Association of New Zealand estimates that 40,000 tracks are legally downloaded each week in New Zealand but this is still less than the amount by which CD sales have decreased. The Music Industry Commission however, is expected to report that export earnings of between $6-9m during 2005/2006, have grown substantially in the past year.
38. The sound recording industry is evolving with the increase in digital distribution. This is changing the current operating business model internationally. Altering New Zealand's parallel importing policy is not likely to provide a solution to the issues faced by the domestic sound recording industry.
Retailers
39. The major retailers of music in New Zealand are The Warehouse and Sounds6 (before it ceased operations) as well as numerous independent merchandisers, all of whom parallel import anywhere between all of their CDs to CDs otherwise unavailable through local recording companies.
40. Industry has indicated that if major retailers began parallel importing the bulk of their stock, the distribution, promotion and sales structure for sound recordings in New Zealand could push larger recording companies to move offshore, possibly to the detriment of smaller independent retailers who do not parallel import.
Conclusions
41. Although parallel importing is one of the factors having an effect on the sound recording industry, there is insufficient empirical information to indicate that restrictions on parallel importing would substantially benefit the industry given the detrimental effects piracy is having on the global and domestic market and the changes brought about by new modes of music distribution. For these reasons, I recommend we maintain the status quo and continue to allow parallel importation in the sound recording industry.
Computer Software Industry
42. Nearly all consumer software products sold in New Zealand are imported.
43. New Zealand software developers typically cater for certain niche markets, including logistics software and health information systems. New Zealand software has not yet penetrated the global export markets to any great extent. The risk therefore that New Zealand made software will be parallel imported back into New Zealand and harm New Zealand software developers is low.
44. The computer game industry is included under the software industry heading. The 2005 review indicated that parallel importing had not affected investment in the New Zealand computer game developing industry. The 2007 review indicated that the findings of the 2005 review had not changed.
45. For game software the use of region codes by software publishers reduces the possibility of easily parallel importing many games for retail sale.
46. Developers of business software packages are unlikely to be affected by parallel importing because their products often require customisation to suit specific clients and on-going user support, features which are not typically offered by parallel imported products.
47. Retail prices for software developed overseas, including games, have fallen since parallel importation was introduced. There is an increasing trend towards digital distribution which could affect some local distributors and retailers. It appears however, that New Zealand retail stores will continue operating effectively alongside digital distributors for the foreseeable future.
48. Overall, our analysis has shown that the computer software industry in New Zealand is not experiencing substantial negative effects from parallel importing that would warrant a change in the current policy. I therefore recommend we maintain the status quo and continue to allow parallel importation in the computer software industry.
Film Industry
49. The New Zealand film industry economically forms a substantial part of the creative sector and the level of investment and innovation in this industry continues to be an issue of significant importance. Internationally the film industry is cyclical experiencing periods of growth and decline. These cycles impact heavily on the New Zealand film industry.
50. Section 35(3) of the Copyright Act 1994 makes it an infringement of the copyright in a work if a person who does not hold the New Zealand copyright imports a film into New Zealand within 9 months of the film's first cinematic release date. The exception to this is where the film has been imported for the importer's own private and domestic use7. The ban was originally introduced as a sunset clause under section 35(5) and is set to lapse in October 2008.
51. The 9 month ban was originally introduced in response to concerns that otherwise:
- DVD films would be available at the same time as their New Zealand cinematic release period;
- Cinemas would be forced to purchase more expensive original prints closer to the film's international release date;
- The number of second-hand prints available for cinematic exhibition would decrease and this would cause an increase in operational costs which would be passed on to the consumer through increased ticket prices;
- There would be reduced ticket sales and box office takings which would decrease investment in the production of New Zealand films; and
- The economic viability of many provincial cinemas would be compromised which would have a negative social impact on provincial centres.
52. The 2007 review analysed these concerns, plus the actual impact of parallel importing on the film industry and its potential future impact. It recommended reducing the length of the ban to a period of 6 months, and either repealing the sunset clause or having it reset for a period of 10 years.
Film Production Industry
53. Between 1999 and 2004, the screen production industry doubled in size, but since then it has declined from 2004 levels.
54. The film production industry's concern is that New Zealand made films that had been released overseas first would be parallel imported in DVD format into New Zealand and made available for sale at the same time as the domestic cinema release, which may decrease cinema ticket sales. This would also result in less funding from the New Zealand Film Commission for future film productions, which provides funding for many New Zealand film productions based on predicted box office takings8.
55. New Zealand is the main market for New Zealand motion pictures which gross on average $600,000. In a good year 6 New Zealand films are released in New Zealand cinemas, only a few of which reach cinematic audiences outside of Australasia, however many are released on DVD. There have been 2 films9 in the past 2 years that have had an overseas DVD release before their New Zealand theatrical release. Both of these films had specific appeal to niche audiences outside of New Zealand. Neither film was available on DVD in New Zealand within 9 months of their theatrical release. In 2007 a total of 6 New Zealand Film Commission funded films10 were released outside of New Zealand onto DVD.
56. Based on this statistic, it does not appear that unrestricted parallel importation of films has had a substantial effect on domestic investment in the New Zealand film production industry in the last 2 years.
57. International involvement in co-production and investment in New Zealand films is becoming more common especially for more successful New Zealand films. A result of these co-production agreements is often that a successful New Zealand film will be released internationally before its availability in New Zealand, and subsequently, the period of New Zealand cinematic release protected from DVD competition is limited. There is little current evidence to suggest that the parallel importing regime affects the decision to produce films in New Zealand.
58. For the most part, the decision to produce international films in New Zealand is based on a number of external factors other than the potential impact of parallel importing. The 2007 review indicated that location, environment, exchange rates, tax system, grants/subsidies and film-making infrastructure are more significant factors in considering the choice of production location.
59. However, if the threat of competition by DVDs is seen as a real risk to New Zealand box office takings and discourages investment in New Zealand films, there could be a negative impact on the number of films produced in New Zealand.
Film Distribution Industry
60. The film distribution industry operates within format release "windows" intended to maximise promotional investment and returns from each of the formats for a motion picture title. These windows typically operate on a sliding time scale, depending on the anticipated popularity of a film. Format release windows allow for the orderly release of films in a given territory. In New Zealand this also allows domestic promotion to piggy-back on international promotion material.
Time period in which format windows typically operate?
| Release Format |
Release Date |
| DVD |
3 – 6 Months (after theatrical release) |
| Pay-Per-View |
6 – 9 Months (after theatrical release) |
| Pay Television |
9 – 12 Months (after DVD release) |
| Free-To-Air |
12 – 24 Months (after DVD release) |
61. Rights to distribute a title are sold by territory and for this reason motion pictures can be released on different dates internationally which can cause format windows to overlap between countries. Often films are released overseas earlier than in New Zealand. 2007 figures reveal that New Zealand film releases were on average 12 days behind the US release date for blockbuster films. This figure reduced to an average of 5 days if 1 film in particular was excluded.
62. With regards to non-blockbuster films, the period of theatrical screening is shorter and availability in DVD format tends to be closer to the cinematic release date. Typically in New Zealand, DVD availability for these films is anywhere from 1 to 3 months after their cinematic release date, although this is variable and can be longer for films that require translation and subtitling.
63. The average time between New Zealand cinematic release and international DVD release for middling and marginal films11 varies greatly. This is because often there is a dependence on the availability of second hand prints which fluctuate in quantity. It is likely that more non-blockbuster and especially film festival films would be available on DVD in the New Zealand market concurrently with theatrical release if the ban were reduced to 6 months. There are, however, already some cases of such competition and it does not appear to have had a significant negative impact on cinema attendance. This does not automatically preclude the potential impact competing DVD availability could have in the future given the increasing number of middling and marginal films that are released cinematically in New Zealand.
64. The typical format windows shown above are likely to remain relevant at least until digital distribution via the internet becomes widespread. Altering the ban will therefore have limited impact on blockbuster films but could result in fewer cinematic releases for middling and marginal films.
Film Exhibition industry
65. There are 4 types of business models for the 100 cinemas and 350 screens in New Zealand: commercial complexes; provincial cinemas; rural cinemas and boutique cinemas. The impact of parallel importing depends on the type of cinema, and the type of film being shown, the latter of which is usually classified as either blockbuster, marginal/middling, or art house. New Zealand uses a combination of new and used 35mm film prints for screening films. A film typically has two or more releases before it completes its "run" at cinemas with 70 percent of its revenue for each title derived from the first 3 weeks of screening. For blockbuster films, a screening will usually last no more than 4 weeks at any given cinema.
66. Commercial complexes are predominantly situated in New Zealand's 5 main centres and generally have the earliest blockbuster film12 releases on multiple screens. For commercial complexes screening blockbuster films, the gap between international cinematic release dates and New Zealand cinematic release dates, have in recent times closed to within a few days in most cases, with occasional simultaneous releases.13
67. Investment in provincial cinemas has continued in recent years. Industry has indicated that these cinemas, which are predominantly locally owned, are able to operate on an economically viable basis through the purchase of older, often used prints14. Provincial cinemas typically purchase used prints from commercial complexes, accordingly showing blockbuster films after they are released in such complexes. For provincial cinemas, the average time between cinematic release of blockbuster films and their DVD release is about 20 weeks.
68. Provincial cinemas screen a combination of blockbuster films as well some middling and marginal titles. Provincial cinemas participate in 70 to 80 percent of first national releases for film titles released in New Zealand, and receive a reasonable number of day and date national releases for blockbuster films which are for the most part closely linked with their US release date.15
69. The concern for provincial cinemas if the parallel importing ban were to lapse or if the length of the ban were shortened, is that commercial cinemas would be forced to bring forward their cinematic release dates in some instances, particularly for middling and marginal films. Provincial cinemas would be forced to follow suit if they wished to maintain some national day and date releases. Industry has stated that this would require the use of new prints which are more expensive to purchase and the risk would be that the increased costs would make the business model for provincial cinemas no longer viable.
70. Rural cinemas operate on a different commercial model to the rest of the exhibition industry. A film may run for up to 5 or 6 months concurrently with its availability in DVD format. Rural cinemas often rely on public grants and community support with added revenue deriving from associated bars and restaurants. Evidence suggests that with parallel importing there would be some impact on rural cinemas with possibly fewer day and date releases for blockbuster and marginal films. There tends to be a greater delay between international cinematic release and rural cinematic release for marginal films as compared to blockbuster films. It is argued that this delay could cause greater competition with DVD availability to the extent that some marginal films may not be screened at all as audiences may be too small to justify showing them. However, because of the unique commercial model of rural cinemas, if the 9 month ban were shortened or allowed to lapse, the extent of any negative impacts would probably be minimal.
71. Boutique cinemas, also known as "art house" cinemas, have increased investment and expanded in major centres over the last 2 to 3 years. For boutique film releases, 1 or 2 film prints are usually made available in New Zealand and circulated domestically before their availability in DVD format. There is concern that if the ban lapses, the economic viability of film festivals could be threatened and some boutique films may not be released at all cinematically in New Zealand as there would be competing parallel imported DVD versions available concurrently.
72. Evidence suggests that the risk to boutique cinemas and film festivals is fairly low. The requirement for an imported DVD to be classified as suitable for showing to a particular audience as well as challenges for individual importers in tracking down the films means that parallel imported films rarely compete with cinematic exhibition on a commercial scale. It is likely that the concurrent availability of films in DVD format during their cinematic exhibition, will have some negative impact on ticket sales.
73. The format release windows for film look likely to continue in the near future. Although day and date releases in New Zealand have come closer to the US release dates, there is still some time delay between New Zealand and international cinematic release periods for certain films. The introduction of digital exhibition technology means the format release windows could become obsolete, although it has yet to achieve widespread global roll-out and it is unclear whether or when it will be rolled-out in New Zealand.
74. Currently, the New Zealand cinema exhibition industry has not indicated any advantage in converting to digital exhibition. The set-up costs range in the vicinity of $125,000 - $175,000 and there is also an increase in the costs of showing digital films as compared to print films.
Sunset clause
75. The 9 month ban will expire in October 2008. The purpose of the temporary ban was to enable review of the uptake of digital exhibition facilities in New Zealand which, if widespread, would cause format release windows to become obsolete.16 Analysis has shown the uptake of digital exhibition facilities is still 5 to 15 years away before it could be applied to the New Zealand business model for cinema exhibition.
Conclusions
76. The concerns that led to the 9 month ban on parallel importing for films remain valid. The length of time between the first release date (usually in the United States) and the New Zealand release date for blockbuster films has in most cases shortened in recent years to within a few days. The result is that for the majority of blockbuster films, international DVD release is 3 to 6 months after cinematic release in New Zealand. Maintaining the 9 month ban would enable adequate time for a film's format release "window"17 to operate for blockbuster as well as middling and marginal films. If the ban were reduced or repealed, there would be a risk that some middling and marginal films would not be available for consumers to view cinematically.
77. Investment in the New Zealand film industry is driven by a number of factors often excluding the potential impact of parallel importing. With the increase in co-produced New Zealand films, there is a greater risk that New Zealand films are available in DVD format on the international market concurrently with their New Zealand cinematic exhibition. A nine month ban will reduce this risk.
78. For these reasons, I recommend the 9 month ban on parallel importing films from their first international release date be maintained.
79. Because digital exhibition facilities in New Zealand are some way from being widespread, I recommend retaining the sunset clause for a period of 5 years. It is probable that the Copyright Act 1994 will be reviewed before digital exhibition becomes widespread, in which case there may be an earlier opportunity for the impact of a ban on film importation in relation to format release windows to be re-evaluated.
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